According to the latest research by Fidelity International, individuals looking to retire at the age of 65 on a company’s defined contribution (DC) pension scheme, which is linked to stock market growth, will have to think again. They suggest that a considerable top-up will be required in order for people to retire at 65 and maintain a pension income of around two-thirds of their final salary. The study estimates that an employee earning an average salary of around £26,000 per annum and relying solely on employer’s contributions will have to retire at 77 in order to be assured a comfortable pension (assuming average market returns and 40 years worth of contributions). In this scenario an individual looking to retire on two-thirds of their salary will have to contribute about £170 per month more than they currently do.  

The study comes at a time when many organisations are pulling their final salary pension schemes and replacing them with a defined contribution (DC) scheme. The major difference is that the DC scheme requires employees to contribute to the fund with an employer matching a proportion of the savings. In addition, with a final salary schemes an employee is safe knowing they would be entitled to a proportion of their final salary regardless of fund performance. However, with the DC scheme the funds performance will directly impact the pension pot and ultimately an individual’s income upon retirement.

The study illustrates the glaring and stark contrast between the two pension schemes and what it means for everyone concerned. However, very few see it as a problem according to another study conducted by the BBC.

It concludes that saving for ones retirement through a pension is not on the top priority list for many people living in Britain. This can have severe consequences for the economy as our ageing population puts an even greater strain on our working population to help fund their retirement through the state pension provision. However, with the government continually pulling back that safety net it is important for people to become more retirement savvy.